[Opinion] Revenue Sharing vs Profit Sharing in AOP Taxation

CA Paras K Savla – [2026] 186 taxmann.com 501 (Article)

1. Case Background

The dispute in Sanand Properties P. Ltd. arises from a joint development arrangement in the real estate sector, structured as an Association of Persons (AOP). Sanand Properties P. Ltd. (SPPL), a private limited company, owned development rights over a large parcel of land in Pune. In 2003, SPPL entered into an AOP Agreement dated 29 April 2003 with M/s Raviraj Kothari & Co. (RKC) to jointly develop a residential housing project under the name Fortaleza Developers.

Under Clause 7 of this agreement, the AOP was to collect all sale proceeds from buyers of residential units. SPPL, as the land-contributing member, was entitled to 35% of the gross sale receipts directly. The remaining 65% was to be applied by RKC to first meet all construction and project expenses, with the net balance constituting RKC’s share of income. No expenses of the project were charged to SPPL’s 35% share. SPPL bore no construction risk and was insulated from the project’s cost overruns.

SPPL filed its returns of income for the relevant assessment years, declaring the amounts received from the AOP as its share of profit and claiming exemption on the ground that the tax on the AOP’s income was payable by the AOP itself under Section 167B(2) of the Income-tax Act, 1961. The AOP, in turn, claimed a full deduction of its profits under Section 80IB(10) as a qualifying housing project. The returns for AY 2007-08 and AY 2008-09 were each selected for scrutiny under Section 143(3) and assessment orders were passed without the Assessing Officer examining the fundamental nature of the income.

A survey under Section 133A was conducted at SPPL’s premises on 23 December 2010. Six documents were impounded, including the original AOP Agreement, audited financial statements of the AOP for FY 2007-08, books of account of SPPL, the development agreement with M/s Yerawada Stud Farm & Agriculture, an auditor’s letter computing SPPL’s entitlement from the AOP, and standard sale agreements for residential units. The statement of SPPL’s director was also recorded on oath under Section 131.

On 11 January 2011, the Revenue issued notices under Section 148 of the Act seeking to reopen assessment for both AY 2007-08 and AY 2008-09 on the ground that the income accrued to SPPL from the AOP was in the nature of a revenue share from gross receipts and not a profit share, and had accordingly escaped assessment. SPPL filed objections which were rejected, and the matter travelled through the Bombay High Court to the Supreme Court via three civil appeals.

2. Legal Issues Before the Court

The Supreme Court was called upon to decide two distinct questions that arose from the same facts:

Issue I—Validity of Reassessment – Whether the notices under Section 148 seeking to reopen the completed assessments of SPPL for AY 2007-08 and AY 2008-09 respectively were legally valid, and specifically, whether the Revenue had ‘reason to believe’ based on ‘tangible material’ that income had escaped assessment, or whether the reopening amounted to a change of opinion on material already considered during the original proceedings.

Issue II—Characterisation of Income – Whether the 35% share received by SPPL from the AOP pursuant to Clause 7 of the AOP Agreement was:

(a) a share of profit of the AOP, exempt from tax in SPPL’s hands by virtue of Sections 86 and 167B(2) of the Act, or

(b) a share of revenue from gross receipts constituting an overriding title, taxable directly as income in SPPL’s hands.

3. Relevant Statutory Provisions

3.1 Section 147—Income Escaping Assessment

Section 147, as it stood prior to the amendment by Act 23 of 2012, empowered the AO to reopen an assessment where he had ‘reason to believe’ that income chargeable to tax had escaped assessment. The preconditions are:

(i) formation of a genuine reason to believe based on tangible material; and

(ii) recording of reasons before issuing the notice under Section 148.

The proviso to Section 147 restricts reopening beyond four years to cases where there has been a failure on the assessee’s part to disclose fully and truly all material facts. Where reopening is within four years, no such failure needs to be demonstrated by the Revenue.

Explanation 1 to Section 147 clarifies that mere production of account books or other evidence does not automatically amount to disclosure, unless the AO’s attention is drawn to the specific items therein that are relevant to the assessment.

3.2 Section 148—Issue of Notice

Section 148 mandates that before reopening an assessment, the AO must record his reasons in writing. This requirement is substantive in nature—it enables the assessee to file meaningful objections and allows the Court to examine the jurisdictional basis of the reopening. The validity of reopening must be tested exclusively on the basis of the reasons as recorded, and cannot be supplemented by reference to materials gathered subsequently.

3.3 Section 86 Read with Sections 67A and 167B

Section 86, read together with Section 67A, governs the share of an AOP member in the income of the AOP. Where the AOP is chargeable to tax at the maximum marginal rate, the member’s share is not again included in the member’s total income. The proviso to Section 86 provides that in any other case, the share of the member shall form part of the member’s total income. Section 167B(2) taxes an AOP at the maximum marginal rate where the shares of its members are indeterminate.

3.4 Section 80IB(10)—Deduction for Housing Projects

Section 80IB(10) provided a 100% deduction to undertakings developing housing projects approved by a competent authority, subject to conditions regarding unit size and project area. The deduction is computed on the profits derived from the eligible project during the relevant previous year.

3.5 Section 115JB—Minimum Alternate Tax

Section 115JB provides for computation of MAT on the ‘book profit’ of a company, with a prescribed list of permissible additions and deductions. Whether a share of AOP income is includible in, or deductible from, book profit was a subsidiary issue in the assessment for AY 2008-09.

4. Arguments of Both Sides

4.1 Submissions on Behalf of the Assessee (SPPL)

SPPL argued that the reopening of assessments for both years was nothing more than a change of opinion, which the law does not permit. The AOP Agreement had been submitted to the AO during the scrutiny assessment for both years. The returns of income contained explicit disclosures about SPPL’s membership in the AOP, the income derived from it, and the legal basis for exemption under Section 167B(2). The AO had passed Section 143(3) orders with full knowledge of the AOP’s existence. No new and tangible material had emerged to change the position.

On the characterisation issue, SPPL contended that the 35% share was a share of the AOP’s profit, since the AOP had been assessed as a distinct legal entity and had legitimately claimed deduction under Section 80IB(10). SPPL relied on the consistent findings of the ITAT and the Bombay High Court in parallel proceedings relating to the AOP itself, which had held that Clause 7 reflected profit sharing. Those findings had attained finality since the Revenue had not preferred any further appeal.

4.2 Submissions on Behalf of the Revenue

The Revenue contended that the impounded documents and the director’s statement under Section 131 constituted fresh and tangible material that had not been specifically brought to the AO’s attention during the original assessment. Producing the AOP Agreement without highlighting Clause 7 and its mechanics did not amount to adequate disclosure of the primary facts.

On the substantive issue, the Revenue argued from the plain language of Clause 7 – the clause itself uses the expression ‘share of revenue/income’ and not ‘share of profit.’ SPPL was entitled to 35% of gross receipts from the first rupee of sale, irrespective of the project’s profitability. In AY 2008-09, gross receipts of the AOP were approximately Rs. 41.26 crore; SPPL’s receipt of approximately Rs. 14.18 crore corresponded precisely to 35% of gross receipts and bore no relationship to net profit. The Revenue further argued that the AOP’s Section 80IB(10) claim was inflated, since the 35% paid to SPPL should have been treated as an expense in computing the AOP’s eligible profit.

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